What part has deregulation played in the current financial mess we're in?

[notherbob]

I don't know much about it but it seems to me that in the wake of deregulation that has been all the rage in the last 10 years, we have had the Enron debacle and all the failures that have caused the economic mess we're in. Without deregulation, I doubt all these problems would have happened as deregulation made them possible.

Those regulations were put there precisely to prevent these kinds of problems. We have deregulated and let the foxes have their way in the chickenhouse.

Both parties are guilty and we are the ones who have elected those who have caused this crisis. Should we re-elect them?

Should we now have a period of re-regulation? Anybody got any ideas? Anybody care?

[JBond]

I don't know much about it but it seems to me that in the wake of deregulation that has been all the rage in the last 10 years, we have had the Enron debacle and all the failures that have caused the economic mess we're in. Without deregulation, I doubt all these problems would have happened as deregulation made them possible.

Those regulations were put there precisely to prevent these kinds of problems. We have deregulated and let the foxes have their way in the chickenhouse.

Both parties are guilty and we are the ones who have elected those who have caused this crisis. Should we re-elect them?

Should we now have a period of re-regulation? Anybody got any ideas? Anybody care?

De-regulation has helped. It cleared the way for the banks that were responsible in their business practices to buy up the banks that were not. Without that deregulation this whole banking mess would be a thousand times worse.

The biggest problem is in August the Democrats were telling the American people Fannie and Freddie were solid and there was no problem even though John McCain and others started back in 2005 telling anyone who would listen there was massive problems. The Dems continued to block reform in exchange for cash from the corrupt banks.

[ThaBigP]

I don't know much about it but it seems to me that in the wake of deregulation that has been all the rage in the last 10 years, we have had the Enron debacle and all the failures that have caused the economic mess we're in. Without deregulation, I doubt all these problems would have happened as deregulation made them possible.

Those regulations were put there precisely to prevent these kinds of problems. We have deregulated and let the foxes have their way in the chickenhouse.

Both parties are guilty and we are the ones who have elected those who have caused this crisis. Should we re-elect them?

Should we now have a period of re-regulation? Anybody got any ideas? Anybody care?

Let me first clarify your definition of "deregulation". What caused this mess was the busting of the subprime mortgage bubble. That bubble burst due to a sharp rise in energy cost, which resulted in the depression of home prices. I'll try to break it down here:

In 1977 the Community Reinvestment Act was passed, allowing the Government to force lenders to extend loans to those who before would not qualify - their income was too low, they couldn't scratch together the down payment for a house, etc etc. But up until 1995, those "subprime" mortgages represented a rather small percentage of all mortgages out there. As a result, a much smaller percentage of banks' portfolios were tied to subprime mortgages. There were defaults/forclosures back then to be sure, but again, being such a small percentage of the entire mortgage industry those forclosures didn't bring the whole system down.

In 1995, the CRA was modified to further reduce credit/income/down payment requirements. No down-payment mortgages suddenly became part of the "subprime" industry. Furthermore, these mortgages were "back loaded", meaning you only paid some interest for the first 4 years or so. As a result, your payment was low. But after 4 years, the payment shot up, as you had to start paying the principle (the actual amount you borrowed for the house). Many low income people could afford the first 4 years of artificially low payments, but could not afford the full payment when they started to chip into the principle. But, and here's the dirty little secret, as long as home prices kept climbing upwards, there wasn't a problem. Because if a person found they could not afford the payment after the 4 year "cheapie payments", they could sell the house. After all, it was now (after four years) worth more than what was left on the loan. The bank got repaid, and the former owner usually got to pocket a bit of loot as well. All were happy. In fact, the subprime system was forced even more harshly on the lending industry - the Justice Department in the '90s sued lender after lender if they balked at handing out these "subprime" loans. The charge was "racism". In fact, Obama was a lawyer, on behalf of ACORN, in suing CitiGroup over a CRA lawsuit - they were accused of not granting enough subprime loans. So they settled out-of-court with ACORN and pledged to dive even harder into subprime lending.

http://freerepublic.com/focus/f-news/2105449/posts

The added pressure from Justice as well as activist groups such as ACORN ballooned the percentage of subprime mortages in the mortgage industry after 1995 to nearly 50% of all mortgages. Then something went bump in the night (remember the "if houses keep going up in price" it'll all work bit?)

A couple of years ago, energy prices spiked. This is largely due to government's moratorium on domestic energy production at precisely the same time emerging markets such as China and India were gobbling up as much energy (i.e. oil) as they could on the world market, helping to drive prices up. How did this contribute? Well, for starters, one reason home prices kept climbing was the increasing demand - credit was easy thanks to subprime mortgages, so everybody and their mama was getting a house. Supply vs Demand is a rule that cannot be broken, so prices went up. When energy prices spiked, many people put off buying a home. That depressed demand. Causing prices to fall. And when housing prices fell, all of a sudden a guy who was facing the "4 year bill increase" could no longer sell out of his/her home. After all, the house was now worth LESS than the amount left on the loan. So guess what....they walked. They put the keyes under the mat, hung an "abandoned" sign on the door and walked away. Hundreds of thousands of them. That caused housing prices to free-fall, further compounding the problem. Now banks were on the hook for HUNDREDS OF BILLIONS OF DOLLARS of these loans, bundled up and sold as mortgage backed securities to firms such as Freddie and Fannie, and other banks around the world. When home prices plummetted, the value of these securities became virtually worthless overnight. So...these banks around the world had sent out, by some measures, trillions of dollars in money, and received what was now worthless paper (the subprime mortgage-backed securities). So they stopped lending money. THAT was the credit freeze that the bailout was supposed to address.

The reason I asked for a clarification of your definition of "deregulation" is this: Do you consider the government creating and then FORCING subprime lending on the industry an act of "deregulation"? Would you consider the Justice Department suing the bat snot out of lenders who questioned the wisdom of subprime lending an act of "deregulation"? Or would you consider the government FORBIDDING domestic energy production an act of "deregulation"?

It is true that sensible regulation of Freddie and Fannie was blocked...but not by Republicans. It was blocked by the Democrats in the Banking Committee. Both regulations proposed by Bush and McCain. The vote was almost competely along party lines, by the way. However, even those acts of belated regulation were likely too late. The problem really began over a decade ago. This whole "both parties are to blame" is nonsense spouted by the likes of Barney Frank, Chris Dodd, and the others who pocketed money from Fannie and Freddie in return for blocking reform measures. And those who intensified efforts on the part of Justice to force more subprime lending on the market in the '90s. To understand the real roots of the problem is to understand where to place the blame...but more important than that is to be armed with information so we never repeat the mess again. Unfortunately, we're in the verge of handing the entire reins of governement over to those who caused the problem...because they claim to be the only ones with the solution...which is more of what caused the problem...government meddling in the markets for the sake of "social justice".

[arglebargle]

This is laughable. The big problem was particular big biznesses going starry eyed over huge bonuses, and the guys at the top were asleep at the switch.

[ThaBigP]

This is laughable. The big problem was particular big biznesses going starry eyed over huge bonuses, and the guys at the top were asleep at the switch.

What you're referring to was a *symptom* of the problem...not the cause. Again, there was TONS of money to be made before the subprime bubble burst. Lenders, for their part, stopped complaining about subprime lending after the money started raking in and Freddie and Fannie guaranteed these risky loans (on the backs of you and me, the taxpayers). But the root of the problem was, is, and always shall be government trying to reengineer the mortgage industry to benefit constituents. They then tried to sweep all concerns under the rug by putting the taxpayer on the hook if things ever went bad. And boy did they ever go bad.

[JBond]

This is laughable. The big problem was particular big biznesses going starry eyed over huge bonuses, and the guys at the top were asleep at the switch.

Where was he wrong? He is 100% correct as to the origins of this mess.

[arglebargle]

ThaBigP, you have put forward what I consider to be the talking point the present folks in charge are using to make excuses for being asleep at that switch. Republican administrations tend to de-regulate, and cut supervision of businesses in most fields. They did this in the financials as well. There appears to be some actual evidence that this excuse is not so valid. Okay, here is this snippet:

"Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

and this one:

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.
Federal Reserve Board data show that:
-More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
-Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
-Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

emphasis added. Go here if you want to read the thread.

http://cowboyszone.com/forums/showthread.php?t=131756


The issue of Redlining that brought about the Community Re-investment act was not just about giving loans to people that couldn't afford it. (note that it worked for decades with no major problems). Banks would not loan equally to people with functionally identical credit, if they were not the typical couple buying into a typical new suburb.

Also, you present a lot of explanation as fact, without any backing. What are the "bat snot" numbers of institutions that were sued for Redlining? Where are the numbers for your explanations?

While I haven't gone back to check it out, I recall that the fight over Fannie Mae/Mac was viewed as another power grab by the Republican Administration which, having cried Wolf a few to many times, and having shown they weren't much interested in negotiation, was looked at with profound suspicion.

I think this whole line is an excuse for those in power to ameliorate their responsibility for (or lack of responsibility in) this mess.

[ScipioCowboy]

http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html

http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html

Ron Paul is absolutely right regarding this crisis. Although deregulation has been a factor, it's hardly been the primary impetus. This crisis has been caused largely by the meddling of extra-market forces, mainly the FED and the Federal Government.

Thus far, Paul's solution has been the best one: If you wish to increase regulation, then increase regulation on the FED. This crisis would not have been possible if interest rates had not been kept so low for so long.

[JBond]

Arglebargle, you dodge like a champ. What is your top five reasons for voting for Obama?

[BrAinPaiNt]

Maybe it is just me but it would seem that Deregulation or more Regulation is not the complete answer.

One would think better regulation would be the right answer. Whether that be with one group or another.

You could have less regulation if it is better regulation.

I think too many want none or too much (not saying people here) which seems to go overboard in either direction instead of looking at it from a angle where you could just put in better regulation in a minimal state.

[masomenos]

Maybe it is just me but it would seem that Deregulation or more Regulation is not the complete answer.

One would think better regulation would be the right answer. Whether that be with one group or another.

You could have less regulation if it is better regulation.

I think too many want none or too much (not saying people here) which seems to go overboard in either direction instead of looking at it from a angle where you could just put in better regulation in a minimal state.

I agree with this 100%. Over regulation is a problem for obvious reasons and a true, no regulation, free market only works as a theory. Better regulation is what we need and, as you say, better could, in turn, mean less.

[Sasquatch]

The biggest problem is in August the Democrats were telling the American people Fannie and Freddie were solid and there was no problem even though John McCain and others started back in 2005 telling anyone who would listen there was massive problems. The Dems continued to block reform in exchange for cash from the corrupt banks.

Someone posted an article a few days ago that effectively debunked the republican talking point that FNM and FRE and the CRA were at the center of the crisis.

LINK (http://www.miamiherald.com/news/politics/AP/story/722379.html)